IHOP 2010 Annual Report Download - page 42

will be received on a timely basis, or even if obtained on a timely basis, that such payments will prevent
losses to such franchisee or enable timely franchise payments. Accordingly, in cases in which a
franchisee experiences increased insurance premiums or must pay claims out-of-pocket, the franchisee
may not have the funds necessary to pay franchise payments.
Franchisees generally are not ‘‘limited purpose entities,’’ making them subject to business, credit,
financial and other risks. Franchisees may be natural persons or legal entities. Franchisees are often
not ‘‘limited-purpose entities,’’ making them subject to business, credit, financial and other risks which
may be unrelated to the operations of Applebee’s or IHOP restaurants. These unrelated risks could
materially and adversely affect a franchisee and its ability to make its franchise payments in full or on a
timely basis. Any such decrease in franchise payments may have a material adverse effect on us. See
the Risk Factor titled ‘‘An insolvency or bankruptcy proceeding involving a franchisee could prevent the
collection of payments or the exercise of rights under the related franchise agreement,’’ below.
An insolvency or bankruptcy proceeding involving a franchisee could prevent the collection of payments or
the exercise of rights under the related franchise agreement. An insolvency proceeding involving a
franchisee could prevent us from collecting payments or exercising any of our other rights under the
related franchise agreement. In particular, the protection of the statutory automatic stay that arises
under Section 362 of the United States Bankruptcy Code upon the commencement of a bankruptcy
proceeding by or against a franchisee would prohibit us from terminating a franchise agreement
previously entered into with a franchisee. Furthermore, a franchisee that is subject to bankruptcy
proceedings may reject the franchise agreement in which case we would be limited to a general
unsecured claim against the franchisee’s bankruptcy estate on account of breach-of-contract damages
arising from the rejection. Payments previously made to us by a franchisee that is subject to a
bankruptcy proceeding also may be recoverable on behalf of the franchisee as a preferential transfer
under the United States Bankruptcy Code.
The number and quality of franchisees is subject to change over time, which may negatively affect our
business. Our Applebee’s business is highly concentrated in a limited number of franchisees. We
cannot guarantee the retention of any, including the top performing, franchisees in the future, or that
we will maintain the ability to attract, retain, and motivate sufficient numbers of franchisees of the
same caliber. The quality of existing franchisee operations may be diminished by factors beyond our
control, including franchisees’ failure or inability to hire or retain qualified managers and other
personnel. Training of managers and other personnel may be inadequate. These and other such
negative factors could reduce the franchisee’s restaurant revenues, impact payments under the franchise
agreements and could have a material adverse effect on us. In the case of Applebee’s, these negative
factors would be magnified by the limited number of existing franchisees.
The inability of franchisees to fund capital expenditures may adversely impact future growth. Our
business strategy includes the periodic updating of Applebee’s and IHOP restaurant locations through
new remodel programs and other operational changes. The success of that business strategy will depend
to a significant extent on the ability of the franchisees to fund the necessary capital expenditures to aid
the repositioning and re-energizing of the brand. Labor and material costs expended will vary by
geographical location and are subject to general price increases. To the extent the franchisees are not
able to fund the necessary capital expenditures, our business strategy may take longer to implement
and may not be as successful as we expect.
Third-party claims with respect to intellectual property assets, if decided against us, may result in
competing uses or require adoption of new, non-infringing intellectual property, which may in turn adversely
affect sales and revenues. There can be no assurance that third parties will not assert infringement or
misappropriation claims against us, or assert claims that our rights in our trademarks, service marks
and other intellectual property assets are invalid or unenforceable. Any such claims could have a
material adverse effect on us or our franchisees if such claims were to be decided against us. If our
26